Glamis plc manufactures, distributes and retails glassware. The following matters relate to its financial statements for the year ended 31 July 1998:

(1) On 25 June 1998, one of the company's factories sustained damage from a freak storm. The cost of repairs in July 1998 was \(£ 500000\) and this has been provided for in the financial statements. The company's insurance does not cover this repair.

(2) The company disposed of a fixed asset for \(£ 1\) million in June 1998. The asset cost \(£ 850000\) in August 1994 and had an expected life of five years. The asset was revalued to \(£ 900000\) in the financial statements on 1 August 1996 ; no change to its total useful economic life was recommended. The company does not charge depreciation in the year of disposal of an asset and has based the profit on disposal in the profit and loss account on the carrying value of the asset.

(3) The board of directors decided to close the company's retailing division on the basis of a formal plan submitted by the sales director. The company had accepted a firm offer of \(£ 3\) million for the retail premises by 31 July 1998. The net book value of the premises was \(£ 2\) million. Half of the staff involved in the retailing division were made redundant by 31 July 1998 at a cost of \(£ 500000\); the remaining staff were redeployed and retrained at a cost of \(£ 200000\). All these transactions have been included in the financial statements.

(4) The directors decided to change the accounting treatment of development costs to immediate write-off against profit as costs are incurred. This change has not yet been reflected in the draft financial statements. The balance on the development costs account at 31 July 1998 was \(£ 250000\) of which \(£ 200000\) was incurred by 31 July 1997.

The company's draft summarised profit and loss account shows:

Opening shareholders' funds as on 1 August 1997 were \(£ 1.2\) million, as previously reported.

\section*{Requirements}

(a) Advise the board of directors of Glamis plc on the most appropriate accounting treatment and disclosure for each of the above matters, preparing all necessary calculations. You should refer to relevant accounting standards and legislation as appropriate.

(b) Prepare the following extracts of the financial statements for Glamis plc:
(i) Statement of total recognised gains and losses (ii) Note of historical cost profit and losses (iii) Reconciliation of movements on shareholders' funds.

Transcribed Image Text:

Turnover '000 5500 (3100) Cost of sales Gross profit 2400 Distribution costs (1100) Administrative expenses (500) Profit before taxation 800 Taxation (240) Profit after taxation 560 Dividends (100) 460